At the end of July, the Senate Finance Committee voted on a package of “tax extenders,” which included one provision relating to mortgage debt forgiveness, and how those forgiven debts are taxed. This would extend a law that was initially put in place through the Mortgage Debt Relief Act of 2007. Initially, this law was only in effect until 2010, but was extended through 2014 in 2008 by the Emergency Economic Stabilization Act. Now, the Senate Finance Committee is voting to extend the package through 2016.
At the Jones CPA Group, we believe that it is important for all tax payers to be educated about such changes to tax law. So here’s what you need to know about this vote and how it will affect you.
For the sake of example, let’s say that your home is foreclosed on with you owing a total of $200,000 on your mortgage. The home goes into short sale and sells for only $150,000; the remaining $50,000 is forgiven or cancelled by your lender. Under current law, you would need to report that forgiven debt as income, and you would be required to pay taxes on the forgiven debt.
However, under this tax provision, as much as $2 million dollars in gain from cancelled mortgage debt can be excluded from your taxes and does not need to be reported as income. This can save tax payers thousands of dollars in taxes. This exclusion only applies to your primary residence, and not to rentals or any other properties that may have been foreclosed on.
If you have had your home foreclosed on this year, and part of your debt was forgiven, this extension should be of great interest to you. The Senate Finance Committee voted in favor of this tax provision with a 23-3 vote, and the details of putting the extension into effect are currently being worked out by the Committee. However, this law will likely apply to any homeowner who has had mortgage debt forgiven on their primary residence through the end of 2016.
Keep checking out our blog for updates about this tax law, and other tax-related news. If you would like to learn more about how this will affect your taxes, contact the Jones CPA Group in Orem.